2. Ascertain Financial Health of Your Company

3. Key Financial Q’s: Are You Making Enough Profit?
Liquidity? Enough Money on hand to run/grow your co.
Leverage? ideally proportioned betw. Debt & Equity?
How effectively are you utilizing your assets? A/T
R U providing your investors an Adequate Level of Return?
How close are you to Bankruptcy?
How’s those Bond Ratings?
Do you have Adequate Levels of Investment in your Company's Plant, People & Processes?

4. Various Measures of Your PROFITABILITY
Profitability Ratios:
ROS--- Profit/ Sales
ROA— Profit/ Assets
ROE– Profit/ Equity
Net Profits
Cum Profits

6. NET PROFITS $$
Year 1 $6 million
Year 2 $8 million
Year 3 $10 million
Year 4 $12 million
Year 5 $16 million
Year 6 $21 million
Year 7 $27 million
Year 8 $35 million

7. Profitability * Asset Mgt * Leverage
As measured by ROE
Return on Equity =
net profit
equity
Encompasses the 3 main levers used by mgt to generate return on investors equity
Profitability * Asset Mgt * Leverage

8. Du Pont Formula x x net profit equity Return on Equity = net profit
Value Chain
net profit
equity
Return on Equity =
net profit
sales
sales
assets
assets
equity x x

9. Du Pont Formula x Return on Equity = net profit equity sales assets
Value Chain
Return on Equity =
net profit
equity
sales
assets x

10. Ratio
World Class  
Top
10 cut
Mean
Poor 
ROE*
600%+
100%+
~20%
<15%

11. Profitability * Asset Mgt * Leverage
As measured by ROE
Return on Equity =
net profit
equity
Encompasses the 3 main levers used by mgt to generate return on investors equity
Profitability * Asset Mgt * Leverage

12. Profitability * Asset Mgt * Leverage
Improve ROE by:
Value Chain
Profitability * Asset Mgt * Leverage
net profit
sales
assets
equity x
Increase sales &/or
reduce &/or eff. work assets
Improving Margins
Increasing Leverage

13. IF: Contribution Margin
(Sales- variable costs) / sales
……. below 30%,
Problem =
Marketing (customers hate your products)
Production (your labor & material costs too high),
&or Pricing (you cut price too much).

14. IF:
Contribution Margin is above 30%… but Net Margin is below 20% …Net Margin = Sales - (Variable Costs + Period (Fixed) Costs)  / Sales
Problem= heavy expenditures on Depreciation (perhaps you have idle plant)
& or heavy expenditures on SGA (perhaps you’re pushing into diminishing returns on Promo & Sales Budgets).

15. 7-17%

16. Net Margin above 20%, but ROS (net profit) below 5%.. --
IF:
Net Margin above 20%, but ROS (net profit) below 5%.. --
you either experienced some extraordinary "Other" expense like a write-off on plant you sold
or you are paying too much Interest
(…you may also have spent heavily on TQM initiatives).

17. Profitability * Asset Mgt * Leverage
Improve ROE by:
Value Chain
Profitability * Asset Mgt * Leverage
net profit
sales
assets
equity x
Increase sales &/or
reduce &/or eff. work assets
Improving Margins
Increasing Leverage

18. “Generically, profits are driven by the company’s asset base and by its efficiency working those assets”

20. The higher the better = more efficient use of assets
Asset Turnover
Reveals how effective assets are at generating sales revenue.
The higher the better = more efficient use of assets
Currently you are generating $1.05 in sales for every $1 assets
sales
assets
Asset Turnover =

21. Profitability * Asset Mgt * Leverage
Improve ROE by:
Value Chain
Profitability * Asset Mgt * Leverage
net profit
sales
assets
equity x
Increase sales &/or
reduce &/or eff. work assets
Improving Margins
Increasing Leverage

23. Assets/Equity – simulation takes owner's perspective.
LEVERAGE:
Assets/Equity – simulation takes owner's perspective.
Corp assets fin.w/ debt
Optimal
Leverage
   
Assets
Debt
Equity
1.0 $1 $0
2.0 $2
3.0 $3
4.0 $4
A Leverage of 3.0 says, "For every $3 of Assets there is $1 of Equity
1.8 to 2.8

24. How effective/aggressive R-U in building your Co’s asset base…
It takes $$ to Make $$
&-why not make it using somebody else's…. To help you make even more…

25. “Generically, profits are driven by the company’s asset base and by its efficiency working those assets”

26. Page 3

27. How effective will you be in building your Co’s asset base?
At outset should be spending ~$10-25M / round on plant improvement
By end should expand asset base to min $140M to $160M+

28. For each additional .5% increase in interest -You drop one category
The More Assets you have the better your Bond Ratings
AAA/AA/A/BBB/… BB & beyond is Junk… B/CCC /CC/C/D = default
As your debt-to-assets ratio increases… Your short term interest rate increases…
For each additional .5% increase in interest -You drop one category

29. Stock Price
Profit$

30. STOCK PRICE Function of:
Earnings per Share
Net Profit / # Shares
Book Value
Equity / # Shares
Dividend Policy Good Dividend Policy
STOCK PRICE Function of:

31. Evaluate Your Company’s Financial Situation & Formulate Financial Strategy & Set Objectives...